Path Creation, Path Dependency, and Alternative Theories of the Firm

By Stack, Martin; Gartland, Myles P. | Journal of Economic Issues, June 2003 | Go to article overview

Path Creation, Path Dependency, and Alternative Theories of the Firm


Stack, Martin, Gartland, Myles P., Journal of Economic Issues


During the 1980s, Paul David and Brian Arthur published several papers that are now regarded as the foundation of path dependency (David 1985; Arthur 1989, 1990). The basic assertion in these and related essays is that sub-optimal or inefficient technologies can be become locked in as industry standards, and in instances where there are significant network effects, these inefficiencies may persist for extended periods of time.(1) While we are convinced by the path dependency insight that inefficiencies may become locked in, we are troubled by the theory of the firm, or more precisely, the lack of a theory of the firm in David's and Arthur's leading papers. This essay begins by critiquing how path dependency papers have failed to flesh our exactly how these inefficient processes emerged and became locked in. The rest of the paper focuses on an emerging line of analysis called path creation that combines the insight of sub-optimal lock-in with an emphasis on the active role firms play in shaping their environme nts.

David and Arthur have both presented cases in which they have asserted that less-than-optimal technologies became the industry standard. David's best-known work in this area is his discussion of the layout of the typewriter keyboard, in which he showed how the familiar top row "QWERTY" became the industry standard despite the fact that it is an inefficient organization of keys (1985). Arthur's most popular example concerns the struggle for supremacy over VOR format, and the market's choice of VHS over Beta (1990, 92). Critics of path dependency have attacked the validity of these two well-known cases and have concluded that this thesis is without merit. The issue ofcourse is not that simple: in a sense, it does not really matter whether QWERTY was or was not a good example of path dependency. The real issue is whether market processes can lock in any inefficient or suboptimal technologies, production processes, or products.(2) Robin Cowan and Anne Krueger are among the many scholars who have presented path de pendency examples.

Cowan has published several detailed examples of path dependency (1990, 1996). In his 1990 essay, he put forward a detailed overview of the development of nuclear power reactors in which he argued light water reactors emerged as the dominant technology despite the fact that it was "not the best technology, either economically or technically" (541). Drawing upon Arthur, he asserted that when there are competing technologies and strong increasing returns, "one technology will [come to] dominate the market, and it is not possible to predict [ex ante] which of the technologies will do so. It is likely, however, that the technology which first makes large advances along its learning curve will emerge dominant" (Cowan 1990, 566). While he provided an interesting example of sub-optimal lock-in, he focused his efforts in showing how light water reactors were an inferior technology and did not detail the specific steps firms took to help shape this market outcome.

Krueger (1996) provided another example of path dependency in her discussion of the American sugar industry, where she reviewed the impact of the Sugar Program enacted in 1934 on domestic sugar production. She argued that by the end of the 1960s, the program had led to increased competition from abroad through a policy of reduced tariffs on imports while at the same time it had increased prices for industries that used sugar. She questioned why the International Sugar Association (the growers) and the Sugar Users Group did not strongly object to the 1934 Sugar Program that set in motion these changes. Though she stated that these groups passively watched this instance of legislative lock-in, she also questioned "why neither objected even though it was obviously ruinous to them in the long run," and even wondered "how well the representatives of the various interest groups knew their own self-interests." Krueger concluded that by the 1960s, these programs were no longer beneficial to growers, end-use manufactu rers, or consumers and that the original intention of the program had been lost. …

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